Utility Week

18 | JANUARY 2021 | UTILITY WEEK Policy & Regulation Analysis Ofgem loosens leash on network profi ts Ofgem has raised the allowed cost of capital in its fi nal determinations for network companies, but it's still less than they were looking for and may not be enough to stave off appeals to the CMA. By Tom Grimwood. National Grid has seen the baseline spend- ing allowances for its electricity and gas transmission businesses rise by almost £2.45 billion as part of Ofgem's • nal determina- tions for the RIIO2 price controls. The • gure is just over half of the overall £4.8 billion in requested totex which the reg- ulator disallowed at the dra‚ determination stage in July. Ofgem had previously rejected nearly £3.76 billion of the £7.09 billion of base- line totex allowances requested by National Grid for electricity transmission. It has now returned more than £2 billion, equating to 53 per cent of the rejected expenditure and an increase of 60 per cent when compared to the dra‚ allowance of £3.33 billion. The regulator disallowed £1.04 billion of the £2.6 billion requested by the gas trans- mission business at the dra‚ determination stage but has now returned £451 million – an increase of 29 per cent on its dra‚ allowance of £1.56 billion. At the time of writing, National Grid shares had risen by around 5 per cent in response to the • nal determinations, which also included an upli‚ in the baseline pro• t margin for investors. The other transmission networks received smaller but nevertheless signi• cant increases, with totex allowances rising by 34 per cent to £2.16 billion for SSE's transmis- sion business and by 25 per cent to £1.21 bil- lion for Scottish Power's. "Overall we think this is a package that gets the vital investment we need but does so at a fair balance between customers and investors." Ofgem chief executive Jonathan Brearley "We continue to have concerns and will need to refl ect further as we review and analyse the full settlement in the round over the coming weeks." Rob McDonald, managing director, SSEN Transmission "We are concerned Ofgem's proposals on the headline rate of return will not attract the global investment our transmission business requires if we are to support the net zero ambitions of the UK and Scottish governments, including the prime minister's ten-point plan." Keith Anderson, chief executive, Scottish Power "Although we are pleased with this progress, we've argued that Ofgem could have gone further in limiting shareholder returns and still believe that to be the case." Alistair Cromwell, acting chief executive, Citizens Advice For the latest coverage on RIIO2 and to search Utility Week's archive of content on this subject go to https://utilityweek.co.uk/tag/riio2/ Baseline totex allowances The gas distribution networks had a much lower proportion of their requested expendi- ture disallowed at the dra‚ determina- tion stage and so unsurprisingly received even smaller – although still signi• cant – increases in the • nal determinations. Ofgem said one of the main causes of the increases in totex allowances was the provision of further justi• cation by net- works, which together submitted 22,000 pages of additional evidence. It also made changes and corrections to its modelling and data, and in the case of the gas distribu- tion networks, reduced the requirements for improvements in cost e" ciency. Overall, the regulator increased totex allowances across the transmission and gas distribution sectors by more than a quarter to £20.3 billion. For most companies, their average annual allowance for RIIO2 never- theless remains below their actual and fore- cast yearly expenditure during the current regulatory period. Yearly totex Ofgem also gave • nal approval to £9.3 billion of expenditure outside of the baseline totex such as pass through costs and other allow- ances, bringing the overall total for upfront spending to around £30 billion. It has identi- • ed a further £10 billion of investment which could be approved as part of reopeners dur- ing the price controls. The increases in totex allowances fed How the regulator shifted on allowances

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